The crypto market is in free fall.
Optimism about cryptos taking over from gold as a haven gave out this morning when Russia launched a full-scale invasion of Ukraine. While demand for the yellow metal surged higher, nervous investors fled cryptos.
Today the bitcoin price fell 8.7% to $35,300, down 22% from its February high. The rest of major cryptos followed suit. Ethereum’s price is down 12.5%, BNB 11.1%, cardano 16.4%, XRP 12.5%, and solana 8.2%.
Meanwhile, the Crypto Fear & Greed Index, a barometer of the mood of crypto investors, sank 50% in just four days, entering the “extreme fear” zone.
That sparked some bearish predictions from respected analysts. Blockchain analytics provider Glassnode said its data pointed to “increased selling pressure” on Bitcoin. It added that Bitcoin bulls “face a number of headwinds.”
At the same time, Antoni Trenchev, co-founder of digital assets institution Nexo said, “Geopolitics has, for now, replaced inflation as the primary driver of both traditional and crypto markets.” Trenchev expects Bitcoin to fall to $30,000.
So, what’s driving the sudden reversal in the fortunes of cryptos?
Bitcoin is often touted as a 21st century store of value, the “digital gold”. This has been one of the biggest narratives driving its institutional adoption and price amid unprecedented printing and inflation pressures.
The fact that bitcoin crashed as Russian armoured vehicles entered Ukraine suggests too few investors yet view it as a credible alternative to gold. But there are other reasons that may explain the price weakness over the past week.
Crypto had rallied strongly from their January lows, and some investors may simply have decided to bank profits. The fact that it is still largely a speculative asset also leads to exaggerated volatility with short-term traders amplifying price action.
Uncertainty about the regulatory outlook may be another factor. There are reports that President Biden will soon issue an executive order on cryptos as soon as this week. But nobody knows how strict the rules will be or what they will cover.
The price of bitcoin and other cryptocurrencies is so difficult to predict because this asset class is unlike any other financial instrument.
Unlike stocks and bonds, it doesn’t produce income. Unlike commodities, it doesn’t have industrial utility. And it’s not a medium of exchange either.
So, how do you put a price tag on such an asset?
As I wrote back in January 2021, “What Bitcoin actually is at this point—or at least is attempting to become—is a store of value. In other words, Bitcoin is not competing with paper money like the dollar or euro. It’s competing with “insurance” against paper money.”
It hasn’t lived up to its promise yet.
That’s clear from the diverging fortunes of gold and cryptos over the past week, and in particular today. As tensions over Ukraine mounted, bitcoin nosedived while gold rose 3% to an eight-month high.
The problem, as I wrote before, is that Bitcoin is “still on a roller coaster”, and “for a store of value, 12 years and one recession are just baby steps compared to gold’s track record.” While institutional investors are warming up to cryptos, bitcoin is yet to answer the most important question: is it truly a modern store of value or a speculative risk asset after all?
So far, it’s behaving like the latter.
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